Working Paper: CEPR ID: DP15540
Authors: Francesco Lancia; Alessia Russo; Tim S. Worrall
Abstract: How should successive generations insure each other when the enforcement of transfers between them is limited? This paper examines transfers that maximize the expected discounted utility of all generations subject to a participation constraint for each generation. The resulting optimal intergenerational insurance is history dependent even when the environment is stationary. Consequently, consumption is heteroskedastic and autocorrelated across generations. The optimal intergenerational insurance arrangement is interpreted as a pay-as-you-go social security scheme with means testing and a mixture of flat-rate and contributory-related elements. With logarithmic preferences, the pension received when old depends on the contribution rate paid when young.
Keywords: intergenerational insurance; limited commitment; risk sharing; social security; stochastic overlapping generations
JEL Codes: D64; E21; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Transfers under participation constraint (F16) | History-dependent intergenerational insurance scheme (D15) |
| History-dependent intergenerational insurance scheme (D15) | Consumption patterns that are heteroskedastic and autocorrelated across generations (D15) |
| Past endowment shocks (D15) | Current and future transfers (F16) |
| Optimal sustainable intergenerational insurance arrangement (D15) | Pay-as-you-go social security scheme (H55) |
| Contribution rate paid when young (J26) | Pension received in old age (H55) |
| Structure of the optimal pension scheme (H55) | Participation from younger generations (D16) |
| Current endowment state + History of past promises (D15) | Future promised utility for the old (D15) |